Innovative enterprise and shareholder value
Innovative enterprise and shareholder value
William Lazonick
This article invokes the theory of innovative enterprise to analyse the relation between value creation and value extraction in the evolution of the US economy. Beginning with a managerial, as distinct from financial, explanation for the separation of ownership and control in the US corporation a century ago, I focus on why and how a "retain-and-reinvest" corporate resource-allocation regime has been a necessary condition for innovative enterprise in the US economy. On that basis, I demonstrate that the ideology that the economy will achieve superior performance if business enterprises "maximise shareholder value" (MSV) is a theory of value extraction that promotes a "downsize-and-distribute" allocation regime and that results in employment instability and income inequity. Like the neoclassical theory of the market economy in which it is rooted, MSV lacks a theory of innovative enterprise, and hence cannot explain how, through the investment strategies and organisational structures of its major business enterprises, a national economy might achieve stable and equitable economic growth.
Law and Financial Markets Review, Vol. 8, No. 1, Feb 2014: 52-64.